You are considering the choice between investing $50,000 in a conventional 1-year bank certificate of deposit (CD) offering an interest rate of 5% and a 1-year "Inflation-Plus" CD offering 1.5% per year plus the rate of inflation.

1. Which is safer investment?

2. Which offers the higher expected return?

Consider a portfolio that offers an expected rate of return of 12% and a standard deviation of 18%. T-bills offer a risk-free 7% rate of return. What is the maximum level of risk aversion for which the risky portfolio is still preferred to bills?